A Tax-Free Savings Account (TFSA) is one of the most effective vehicles available to investors seeking to build wealth. By being tax effective, it reduces and, in many cases, removes the burden of paying taxes on returns generated by assets held in the account, which are one of the single greatest destroyers of wealth.
The tax-sheltered nature of a TFSA means that all dividends and capital gains earned on investments held in the account are tax free for life, and typically you can make withdrawals at any time. The annual TFSA contribution limit is calculated each year, linked to inflation and rounded to the nearest $500. For 2019, it was calculated to be $6,000. If an eligible investor, who has never owned a TFSA since their introduction in 2009, chose to invest today, they could make a maximum deposit of $63,500.
For these reasons, now is the ideal time for any eligible individual who is seeking to build long-term wealth to open a TFSA as soon as possible.
Advantages of REITs
An ideal asset to hold in any TFSA to build wealth is a listed real estate investment trust (REIT). Essentially, publicly listed REITs provide investors with a highly liquid means of obtaining exposure to different forms of real estate while generating a stable, recurring passive-income stream. To qualify as a REIT and receive the tax advantages that entails, an entity must receive 75% of its revenue from rent, mortgage interest, or capital gains from properties while paying out most of its net income as distributions to unitholders. This makes them ideal for investors seeking to maximize income and access the power of compounding to accelerate wealth creation.
An ideal REIT to buy is Slate Office REIT (TSX:SOT.UN), which, even after taking a knife to its distribution earlier this year, is still yielding a very juicy and sustainable 6.8%. After disposing of two Manitoba properties in June 2019 for $21 million, Slate Office owns a portfolio of 39 predominantly office properties. It finished the first quarter 2019 with an impressive occupancy rate of 89% which was 0.8% greater than the same period in 2018.
Earlier this year, management embarked on a strategy aimed at unlocking value for unitholders by divesting non-core properties, preserving cash flow, and strengthening the REIT’s balance sheet. That plan also includes boosting the REIT’s return on capital by boosting long-term value creation through opportunistic property acquisitions.
What makes Slate Office an even more attractive investment is that it is trading at a 43% discount to its net asset value (NAV) of $8.49 per unit. That highlights the considerable upside available to investors. It is because of this value disconnect that management has embarked on a unit buyback aimed at acquiring 10% of Slate Office’s outstanding units. The REIT’s distribution reinvestment plan (DRIP) was also suspended to prevent the dilution of existing unitholders through issuing new units.
Slate Office provides the ideal means for investors to generate a recurring passive-income stream with a yield that is significantly higher than traditional income-producing assets, such as bonds and guaranteed investment certificates. By reinvesting its regular monthly distribution to acquire additional units and holding it in a TFSA, unitholders can accelerate wealth creation by accessing the power of compounding and eliminating the corrosive effect of taxes on investment returns.
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Fool contributor Matt Smith has no position in any of the stocks mentioned.